Student Loans

There are two types of student loans – federal and private. As the name suggests, federal student loans are loans given to students and their parents by the federal government through the Department of Education. Loans from other sources are referred to as private loans. The standard repayment term is ten years. However in case of private student loans, the repayment term can be more or even less.

Student loans become payable upon graduation. However the Federal government provides a six month grace period. Most private lenders also provide this six month grace period to start making payments. If you are unable to pay your student loan, you should immediately contact your lender and explain your inability to make the payment. The earlier you contact your lender, the better it is. The lender can review your financial situation and work out alternatives to help you pay off your student loan. Lenders can extend your repayment terms from the standard 10 years to 25 years. This will reduce your installments. If you have a federal student loan, you can qualify for extended repayment if your loan is $30,000 or more and has been availed through a lender associated with the Federal Family Education Loan program or from the Federal Direct Loan program. Private lenders may have their own eligibility criteria. Another alternative is graduated repayment wherein you have to only pay the interest for the initially 4 years. After the fourth year, your payments will increase and you will repay the loan in 10 years. In 2009, the government introduced the income based repayment program that allows you make monthly payments that does not exceed 10 per cent of your total income. You will have to continue making this payment for 25 years. Any balance left after 25 years of payment will be forgiven. If you are facing temporary unemployment, you can also request the lender to temporarily defer your payments until your financial condition improves.

Defaulting on student loan obligations can have serious consequences. If you default in your student loan payments, the lender will take steps to recover the dues. The government can hold back on your federal benefits and use them to pay off your student loan debts. If you are entitled to any tax refunds, you will not receive them and instead they will be used to pay off the debt. If you are employed, then the lender can obtain a wage garnishment against you. Once the debtor obtains a wage garnishment against you, your employer is required to pay a portion of your wages directly to the lender. The lender can also file a lawsuit against you to collect the debt. Once the lender obtains a judgment against you, the lender can seize and sell your assets to recover the debt. The lender can also report you to credit rating agencies. This will adversely affect your credit score and your ability to get credit.

While bankruptcy discharges most debts, student loans cannot be discharged in a Chapter 7 bankruptcy. You can include your student loan obligation as part of your Chapter 13 plan. However you will have to pay off the entire amount. You are unlikely to get any reduction in the amount. If you are filing for bankruptcy under Chapter 7 and you have student loan debts, you can still pass the means test if your income is above the state median income if your monthly disposable income is not sufficient to pay off your student loans. You must show that you or your family will suffer undue hardship if the payments are to be made. You must have in the past repaid part of your student loan dues.

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